Exit Strategies for Real Estate | Hilton Smythe

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Exit Strategies for Real Estate

Learn how to plan your exit strategy for your real estate business, and get support from our expert business exit advisors every step of the way.

Are you at the top of the market?

According to Halifax in 2022, UK house prices are rising at the fastest rate for 15 years. This could spell the ideal time to trigger an exit for many businesses with extensive property portfolios; but, defining exit strategies for real estate depends on how you operate.

The right type of exit varies based on whether you are a sprawling agency or an investor with a vast portfolio. So, what’s the right way to exit?

What is a business exit strategy for the real estate industry?

Real estate businesses differ tremendously from conventional businesses because most independent landlords will exit by selling their property stock to maximise their business’s value.

In contrast, successful agencies are focused more on passing on an operation than individual assets. This creates problems for the entrepreneur because your exit strategy will depend on your operation and how you want to exit it.

However, an exit strategy will always have the same goal regardless of who you are:

To maximise your gains/limit your losses while guaranteeing your personal and financial goals.

Are business exit strategies important for real estate?

All businesses stand to gain from creating a comprehensive business strategy. Presumably, you will want to leave your current position one day, so you must have an orderly transition.

Furthermore, exit strategies account for unexpected exits, such as if you’re overleveraged and the market suffers a catastrophic crash; and don’t discount this from happening. Even though property seems like a safe bet, the 1980s real estate crash led to the market failing to achieve positive growth figures until 1997.

So, what can an exit strategy do for you?

  • Enable you to time the market to get the most for your portfolio.
  • Set up your family by transferring your business to a child or grandchild.
  • Shield your wealth from excessive capital gains tax.
  • Limit your losses if you need to liquidate your assets.
  • Define the future growth of your business.

In short, exit strategies are vital for any property business because they keep more pounds in your pocket.

Challenges of the real estate industry and selling a business

The UK property market is big business. More than 22,000 registered estate agents exist in the UK alone, but this doesn’t account for independent rental businesses.

According to the latest figures, there are 383,600 private landlords in the UK. Some may only have a single property, whereas others may have hundreds of properties. Like established estate agents, landlords face similar challenges when selling their businesses.

So, what are the primary challenges each group faces?

Estate agents:

  • Evaluating the value of your business, including properties and operations.
  • Finding the right buyer.
  • Determining the type of exit (merger, sale of your holding, family succession, IPO).

Estate agents face challenges similar to those of other established businesses, including those in the hospitality and tech sectors. They will also account for similar exits, necessitating a professional exit planner to guide you through the process.

Landlords:

  • Disposing of property assets in an acceptable period.
  • Timing the market to get maximum value for each property.
  • Determining the type of exit (sales and family succession).

With landlords, unless they plan on passing on their properties to a family member, they emphasise liquidating each asset. This necessitates timing the market and handling the complexities of individual sales, which can be problematic for more extensive portfolios.

How to choose the right exit strategy for estate agencies

While private landlords also require exit strategies, their challenges tend to involve selling their existing assets or transition planning for a family member to take over. In other words, they don’t face the same obstacles as a fully-fledged estate agent.

Although there’s significant cross-over for both parties, estate agents have other difficulties in mind. So, what must you consider when selecting an appropriate exit strategy for your estate agency?

Evaluate the pros and cons of each exit strategy

The first step is to evaluate the pros and cons of each exit strategy to see which ones apply to you. An effective exit strategy will account for every contingency, but a business owner will prioritise those that apply to them the most.

Here’s a brief rundown of the most common exit strategies and the type of property business they’re most likely to apply to:

Mergers and Acquisitions (M&As) – Entrepreneurs who want control over their pricing terms and want to maximise the value of their business by selling it to a competitor.

Selling Your Stake – Ideal if you want to sell to a friendly buyer, such as a partner or entrepreneur. This is one of the simplest exits and allows your brand to live on.

Family Succession – Also known as the “legacy exit”, legacy exits allow you to keep your business in the family.

IPOs – IPOs are the holy grail for entrepreneurs. Estate businesses are less likely to experience IPOs unless they have colossal property portfolios or extensive franchises.

Management Buyouts – Passing your property business to your employees enables a smooth transition and allows your business to live on. You may also retain a position as an advisor.

Liquidation – Don’t want the hassle of selling your business? Liquidating it can allow you to dispense with the responsibility of transition planning while maximising its value.

Bankruptcy – The least desirable exit strategy, bankruptcy, is for companies that can no longer function.

No two estate agencies are the same, but evaluating your options is the first critical step to creating a comprehensive exit plan.

Your liquidity needs

While comparing exit strategies, consider your need for liquidity. Do you need the money now, or can you wait for the funds to come to you?

In the former scenario, selling the business or liquidation enables you to receive cash quickly. However, reducing your stake as part of a management buyout or selling your business to a partner for less may be the more straightforward option.

Consider what you want to do for the rest of your life and the exit strategy that best accommodates those desires.

Your legacy

Do you want to see your business flourish even when you’re gone?

Not every business owner cares what happens to their business after they leave, and that’s okay; but, if you are determined to see your name carried on, a management buyout or a family succession exit would offer your estate agency the best chance to continue operating.

Market conditions

Market conditions are relevant to every type of business, but this is even more pronounced within the housing market.

After all, buying an estate agency becomes far less attractive if house sale opportunities are in freefall with little prospect for growth. For example, as of April 2023, UK house sales have fallen sharply, directly impacting estate agents.

Less liquidity makes for poor market conditions for an estate agent, meaning this is likely not the right time for most types of exit, including M&As and IPOs. Instead, this is where a family succession, management buyout or slow-burn liquidation would come to the fore.

Company prospects

Where is your business in its journey?

A flourishing estate agency with 40 years of experience has far better options than a startup struggling to keep its head above water. Your optimal exit strategy depends on how attractive your firm is.

Determining this means calling a professional business valuation agent and monitoring your financials. Putting yourself in a buyer’s shoes is difficult, but with companies like Hilton Smythe, you can get the objective advice you need to settle on the right exit plan.

For example, suppose your estate agent is going through a period of financial turbulence due to outside economic factors. In that case, it may make sense to postpone your exit plan if you want to sell your stake until the market changes.

On the other hand, if your estate agency just published record profits, this could make a potential M&A the better exit option.

Finally, consider your prospects. 

  • Is there more room to grow? 
  • Do you have any expansion plans in the works? 
  • What does the local, regional, or national housing market look like? 
  • Are you competing in a red water area?

Answering these questions will make the picture clearer and simplify the process of choosing the best exit strategy for you.

How Hilton Smythe can help with real estate exit strategies

Is this your first time considering an exit strategy, or are you concerned your current strategy doesn’t come with a passing grade?

At Hilton Smythe, our team consists of experts with decades of experience in helping estate agents formulate, review and execute exit strategies. Our friendly team can guide you through each step in the departure process while providing tailored advice to help you maximise your gains.If you’re determined to exit the right way, schedule your consultation call with our team today.

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